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Fitch Downgrades Beazer's IDR to 'B-'; Outlook Negative

NEW YORK-(Business Wire)-September 4, 2008 - Fitch Ratings has downgraded and removed from Rating Watch Negative Beazer Homes USA, Inc.'s (Beazer) Issuer Default Rating (IDR) and outstanding debt ratings as follows:

—IDR to 'B-' from 'B';

—Senior notes to 'CCC+/RR5' from 'B-/RR5';

—Convertible senior notes to 'CCC+/RR5' from 'B-/RR5';

—Junior subordinated debt to 'CCC-/RR6' from 'CCC/RR6'.

Fitch has also affirmed and removed Beazer's credit facility from Rating Watch Negative as follows:

—Secured revolving credit facility at 'BB-/RR1'.

The Rating Outlook is Negative.

The Negative Rating Watch has been resolved with Beazer's filing of its quarterly and annual financial statements and the amendment to its revolving credit facility. Fitch originally placed Beazer on Rating Watch Negative on Aug. 13, 2007.

The 'RR1' Recovery Rating (RR) on Beazer's secured revolving credit facility indicates outstanding recovery prospects for holders of this debt issue. The 'RR5' on Beazer's senior unsecured notes indicate below-average recovery prospects for holders of these debt issues. Beazer's exposure to claims made pursuant to performance bonds and joint venture debt and the possibility that part of these contingent liabilities would have a claim against the company's assets were considered in determining the recovery for the unsecured debt holders. The 'RR6' on Beazer's junior subordinated notes indicate poor recovery prospects in a default scenario. Fitch applied a liquidation value analysis for these RRs.

The downgrade reflects the current difficult housing environment and Fitch's expectations that the housing environment remains difficult for the remainder of the year and that new home activity will still be on the decline well into 2009. The anemic economy and impaired mortgage markets are, of course, contributing to the housing shortfall. The rating downgrades also reflect negative trends in Beazer's operating margins, further deterioration in credit metrics (especially interest coverage and debt/EBITDA ratios) and erosion in tangible net worth from non-cash real estate charges.

Beazer recently filed its financials for fiscal year 2007 and its 2008 first, second and third quarter 10Qs. The company is now current on all of its required SEC filings. While Beazer's audit committee has completed its independent investigation, the company is still under investigation by the SEC and the U.S. Attorney's Office, which has the potential to result in regulatory fines.

In August 2008, Beazer completed the amendment to its revolving credit facility. As part of the amendment, the commitments under the revolving credit facility were reduced from $500 million to $400 million and the collateralization requirement was increased. The credit facility is also subject to further reductions if Beazer's tangible new worth (TNW) falls below certain thresholds. Additionally, certain financial covenants, including leverage and interest coverage requirements, were eliminated. The amended credit facility contains a TNW covenant and a new liquidity test requiring Beazer to maintain either a minimum ratio of cash flow from operations to interest incurred or a minimum liquidity reserve. At June 30, 2008, there were no amounts outstanding and $71.5 million of letters of credit outstanding under the revolver. After giving effect to the amendment, Beazer had no additional borrowing capacity under the revolver. Beazer expects to add more real estate assets to the borrowing base over the next six months in order to increase availability under the revolver.

The new covenant structure, and in particular the minimum TNW covenant, gives the company flexibility as operating conditions remain uncertain. The low TNW base ($100 million) gives the company some cushion in the event that Beazer recognizes further inventory impairments or reserves against deferred tax assets. So far, Beazer has not recorded valuation allowances against $416.4 million of net deferred tax assets.

Beazer completed its fiscal 2008 third quarter (ended June 30, 2008) with $314.2 million of cash on the balance sheet. Although the company has generated $411 million of cash from operations during the LTM period (ending June 30, 2008), cash from operations during the first nine months of its fiscal year totaled only $24.5 million (which included the receipt of $56 million of cash tax refund relating to a 2007 net operating loss carry back). For all of fiscal 2008, Beazer expects to be cash flow positive and end the year with a cash balance in excess of $450 million.

Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as trends in land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new order activity, debt levels and free cash flow trends and uses.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. 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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