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Fitch Places Technical Olympic USA on Rating Watch Negative.

NEW YORK -- Fitch Ratings has placed Technical Olympic USA, Inc.'s (TOA) ratings on Ratings Watch Negative. The Rating Outlook was previously Positive.

Fitch currently rates TOA as follows:

--Issuer Default Rating (IDR) 'B+';

--Senior unsecured debt and revolving credit facility 'BB-/RR3';

--Senior subordinated debt 'B-/RR6'.

The rating action stems from the severe slowdown in Technical Olympic's major markets and financial difficulties being experienced by the company's Transeastern joint venture. Technical Olympic recently announced that the joint venture (JV) is exploring options to provide sufficient liquidity, including requesting waivers from its lenders regarding potential defaults and permitting future advances under the revolving credit facility, and restructuring land bank obligations. Currently, Technical Olympic and its JV partner do not intend to contribute capital under the existing capital structure. The debt of the joint venture is non-recourse to Technical Olympic. However, this JV is significant to Technical Olympic and the company is unlikely to fully distance itself from it. The Rating Watch will in part be resolved by the ability of the Transeastern joint venture to execute a successful refinancing and/or restructuring without further meaningful support from Technical Olympic. In this currently challenging environment, management of the balance sheet and cash flow generation will also be taken into account as to the Watch status.

There is a potential for an asset impairment charge relating to Technical Olympic's investment in the Transeastern JV (including loans receivable), which totals about $130 million to $140 million. Additionally, the agreement that governs the operations of the Transeastern JV requires the joint venture to make preferred payments to Technical Olympic's joint venture partner. Technical Olympic is required under the joint venture agreement to advance funds (in the form of member loans) to the joint venture in the event that the joint venture is prohibited by its bank agreement to make these payments. Based on Technical Olympic's joint venture partner's current equity investment, the quarterly preferred payment is $3.8 million. Over the past year, Technical Olympic has advanced about $11.3 million to the Transeastern JV to allow for these preferred payments to Technical Olympic's joint venture partner.

Fitch anticipates that Technical Olympic will take a more cautious stance on land purchases during the balance of the year (and in 2007) and that inventories, which have been growing into mid-2006, will decline by fiscal year-end 2006. Fitch anticipates that liquidity will improve, as cash flow comparisons in the second half of 2006 should be much stronger than in the first half of the year.

Fitch will also continue to closely monitor the trends of the broad housing market in its assessment of the appropriate credit ratings for all homebuilders.

The current ratings for Technical Olympic USA are based on the company's broad customer base, conservative land and inventory management practices, strong management team, and acquisition expertise.

Technical Olympic USA is a subsidiary of Technical Olympic SA, a publicly traded Greek corporation. Technical Olympic SA owns approximately 67% of the voting power of Technical Olympic USA's common stock.

Technical Olympic's EBITDA margins were roughly 9% early in the decade, but advanced to 9.7% in 2003, 11.7% for the 12 months ending Dec. 31, 2004, 16.9% in 2005, and 19.0% for the latest 12 months (LTM) from June 30, 2006. EBITDA coverage ratios declined from 7.8 times (x) in 2001 to 4.7x in 2002 and 2.9x in 2003, but then rose to 3.7x in 2004, 5.1x in 2005, and 5.4x for the LTM from June 30, 2006. The FFO interest coverage ratio was 3.1x in 2001, slipped to 2.6x in 2002 and 1.5x in 2003, and then improved to 3.0x in 2004, was steady at 2.9x in 2005, and further improved to 3.6x for the LTM from June 30, 2006. Technical Olympic's debt to EBITDA was 1.8x in 2001 and increased to 3.2x in 2002, then remained essentially stable for the next two years (3.1x in 2003 and 3.3x in 2004) before decreasing to 2.1x in 2005 and 2.2x for the LTM from June 30, 2006. Debt to capitalization was 49.1% as of June 30, 2006, which compares to a ratio of 47.4% at the conclusion of 2005 (and 55.0% at the end of 2004). Inventory turnover has steadily decreased from 1.6x in 2002 to 1.1x in 2005. The company's EBITDA and EBIT to interest ratios continue to be lower than its peers. The debt/EBITDA and other leverage ratios are somewhat higher than those of the other larger public homebuilders that Fitch follows, while Technical Olympic's inventory turnover ratio is similar to the majority of the builders that Fitch rates. Although the company has certainly benefited from the generally strong housing market of recent years, a degree of profit enhancement is also attributed to purchasing design and engineering, access to capital, and other scale economies that have been captured by the large national and regional public homebuilders in relation to non-public builders. These economies, the company's presale operating strategy and a return on equity and assets orientation provide the framework to soften the margin impact of declining market conditions in comparison to previous cycles.

Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest the company's concentration in Florida, historic aggressive growth strategy, below peer credit metrics, and Technical Olympic's size.

Technical Olympic typically options or purchases land only after necessary entitlements have been obtained so that development or construction may begin as market conditions dictate. The company extensively uses lot options. At present approximately 52% of its lots are controlled through options and 24% through joint ventures - among the higher percentages of the public builders that Fitch tracks. Technical Olympic has a small number of specific performance options. A modest amount of its owned or optioned land is unentitled. The company currently has refundable and nonrefundable deposits aggregating $215.3 million and had issued letters of credit of approximately $247.3 million associated with its option contracts. A portion of this represents the capital at risk should Technical Olympic not go forward with the exercise of its options. The company typically controls a five-to-seven-year homesite supply, based on forward delivery projections. It typically owns one-to-two years supply of lots. The balance is options or in joint ventures. It targets communities for completion in a two-to-three-year time frame.

The four acquisitions in late 2002 and early 2003 and the acquisition of Gilligan Homes in September 2004 enabled the company to build its position, broadening product and customer bases in some existing markets, and enabled the company to enter new markets. The acquisitions were typically funded by cash on the balance sheet and debt. Typically, there were earn-outs which reduced risk and served to retain key management. In August 2005, the company, through a joint venture, completed the acquisition of homebuilding assets and operations of Transeastern Properties, Inc., the 37th largest homebuilder in the U.S. in 2004. Now that Technical Olympic has the geographic diversity and has built up its skilled personnel and systems infrastructure, Fitch expects the company will concentrate on expanding volume within these existing markets in the intermediate term.

The company has an $800 million revolving line of credit maturing in March 2010. As of June 30, 2006, Technical Olympic had no borrowings under the revolving credit facility and had issued letters of credit totaling $281 million. The company has about $420 million of borrowing base availability as of June 30, 2006. Technical Olympic's stock has a small float and there has not been share repurchase in the past. The company pays a small dividend.

Debtholders are protected by financial covenants, including adjusted consolidated tangible net worth, maximum indebtedness to adjusted consolidated tangible net worth ratio, minimum interest coverage ratio, unsold land to adjusted consolidated tangible net worth, and unsold units to units closed.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Sep 28, 2006
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