S&P cuts Beazer Homes deeper into "junk" territory

Standard & Poor's Ratings Services on Tuesday cut its corporate credit rating on Beazer Homes USA Inc. further into junk territory on concerns the Atlanta-based homebuilder will breach financial covenants without refinancing.

S&P lowered its corporate credit rating on Beazer to "CCC" from "CCC+," and cut its ratings on the company's senior unsecured notes to "CCC-" from "CCC." The outlook is negative.

The ratings are both considered below investment grade, or "junk" status.

The outlook is negative.

The downgrades follow a larger-than-anticipated loss during for Beazer's second quarter, which Beazer posted in early May. While the loss included "a significant number of noncash and nonrecurring items that did not impair the company's liquidity position," and the company has made progress toward resolving outstanding legal issues, S&P credit analyst James Fielding said "a sharp reduction in shareholders' equity and tangible net worth outweighed these positive factors."

Beazer's lower tangible net worth led to tripping one covenant governing its secured revolving credit facility, Fielding wrote, and the company "appears more likely to breach other financial covenants barring some form of recapitalization."

"We believe that this condition raises the likelihood that the company may pursue various opportunities to reduce leverage, which could include a below-par debt exchange."

The negative outlook reflects the expectation that Beazer will continue post weak earnings because of the condition of its core housing markets, particularly in California, Florida, Arizona, and Nevada, the four states hardest hit in the mortgage meltdown.

S&P would lower its ratings further if Beazer shows larger-than-expected cash flow deficits, the company doesn't resolve its covenant issues or it conducts a distressed debt exchange or similar restructuring. "Barring a substantial equity infusion, we are unlikely to revise the outlook to stable in the near term," the analyst wrote.

Beazer shares closed Tuesday's session down 2 cents at $2.36.