Five Point Holdings LLC Assigned #B-# New Debt Rated #B#; Outlook Stable

Stocks and Financial Services Press Releases Wednesday November 15, 2017 09:00
SAN FRANCISCO--15 Nov--S&P Global Ratings
SAN FRANCISCO (S&P Global Ratings) Nov. 14, 2017--S&P Global Ratings today assigned its 'B-' corporate credit rating to land developer Five Point Holdings LLC. The outlook is stable.

We also assigned our 'B' issue-level rating to the company's proposed senior unsecured notes, one notch above the corporate credit rating. The '2' recovery rating on the notes indicates our expectation for substantial (70%-90%; rounded estimate: 85%) recovery to debtholders in the event of a default. While our analysis indicates a stronger level of recovery from our simulated default scenario, we cap recovery ratings for corporate issuers in the 'B' category at '2'.

Our ratings on Five Point reflect its relatively limited track record and unproven earnings and cash flows, heavy concentration in only three large projects in California, and relatively high leverage as measured by debt to EBITDA. Pro forma for the financing, we expect fully adjusted debt to capital of 26%-28% but that debt to EBITDA will be weak for the rating as EBITDA remains negative. These ratios reflect the early stage of the company. We only expect EBITDA to turn positive by 2019, with leverage approaching a stronger 5x threshold in 2020.

Our stable outlook reflects S&P Global Ratings' view that demand for new homes in FPH's California markets will continue to be strong in the face of constrained supply, and our expectation that the company will continue to deliver on the execution of its business plan through the end of 2018. Our forecast also projects that the company will gradually draw down on its substantial cash position to fund the development of long-term projects and that credit measures such as debt to EBITDA and funds from operations (FFO) to debt will remain weaker than those of other rated land developers.

We could raise the ratings if development occurs ahead of schedule and land sales materially outperform our expectations, which we believe would neutralize heavy negative cash flows at this early stage of development and improve cash flow and earnings visibility. We believe that such a scenario will take until at least 2019, at which point sustainable land sales and debt to EBITDA approaching 5x-6x would likely support additional capital increases for further development.

We could lower the rating if liquidity falls below $150 million over the next 12 months, which we believe could occur if the company accelerates its development expenditures into weak land closings. However, we also view this as unlikely as FPH will be well-capitalized for development after receiving proceeds from the IPO and pro forma for the proposed debt issuance.

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