Bloggers Recap Aborted UCP Debt Offering

As originally appeared in the Troubled Company Reporter.

PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $662 million in assets and $426 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 11% of PICO. Other activists at (RPN) have taken to the Internet to advance the shareholder cause.

The bloggers provide an update on PICO’s third asset sale of 2016.

According to the bloggers, “On December 29, 2016, PICO Holdings announced an agreement to sell 50,000 Long Term Storage Credits to the Central Arizona Groundwater Replenishment District for $12.5 million. RPN reader john s was told by PICO’s Investor Relations Office that the CAGRD approved the transaction on January 5, 2017. PICO indicated that the transaction would close in Q1 2017.

“By our count, that is three asset sales worth about $35 million that have been announced in 2016. According to PICO CEO Max Webb on the Q3 Earnings Call, PICO is slated to receive $6 million in escrow proceeds from the Northstar Hallock sale. Assuming about $5 million of burn over the last two quarters, PICO should have around $40 million in its bank account at the end of Q1 2017.”

Next, the bloggers review UCP’s aborted $200 million debt offering. “On October 14, 2016, UCP issued a press release announcing a proposal to issue $200 million in Senior Notes, due 2021. Moody’s Investors Services, a unit of Moody’s Corporation, assigned UCP a Corporate Family Rating of B3. The proposed $200 million Senior Notes were also rated B3.

UCP also announced that it was negotiating the terms of a two-year secured revolving credit agreement for $25 million. This obligation would be secured by a portion of UCP’s California real estate.

On October 17, UCP inauspiciously halted its pursuit of the $25 million revolver. In the press release, UCP asssured investors that the upcoming $200 million offering would provide sufficient funds for execution of its business plan. UCP noted, ‘No assurance can be given that the pending Notes Offering will be consummated.’ Prescient words.

On October 24, UPC issued a one-sentence press release stating that UCP had ‘withdrawn their previously announced private offering of $200 million aggregate principal amount of their Senior Notes due 2021 in light of challenged market conditions.’

On October 28, Moody’s announced that it had withdrawn all ratings of UCP.

The bloggers explain why Moody’s rated UCP so low. “Moody’s Investors Service publishes its ‘Rating Methodologies,’ which explain how it assesses credit risk for various industries. The Rating Methodologies clarify how qualitative and quantitative risk characteristics affect company’s credit ratings.

“We love Moody’s Rating Methodologies. When we are researching a new industry, it is one of the first sources we consult. While targeted at purchasers of debt instruments, the Ratings Methodologies are replete with valuable information and tools for analyzing participants in an industry.

The Rating Methodologies are free, once you register with Moody’s — which is also free. We highly recommend the Moody’s Rating Methodologies as a source of industry information, and the Homebuilder Rating Methodology in particular.

Moody’s Rating Methodology for Homebuilders helps explain why UCP was unable to sell its high-yield debt in the public market. Moody’s considers five factors to assess the creditworthiness and performance of a builder:

Business Profile
Profitability and Efficiency
Leverage and Coverage
Financial Policy

Moody’s warns that these Five Factors are not exhaustive; other factors and qualitative concerns also influence creditworthiness. But these Five Factors are the most controlling for builder credit ratings.

“One caveat: we have said many times that the homebuilder industry is no favorite of ours. Barriers to entry are low, brand equity does not exist, growth results in negative cash flow and earnings fluctuate with schizophrenic amplitude. The price elasticity of homes can get whacky – when the trough in the cycle is deep, homes barely sell — even when price discounts are enormous.

“As UCP ranks low in Moody’s Five Factors, especially Scale and Business Profile, we now have an idea as to why Moody’s rated UCP B3 and why the Senior Notes did not sell.”

The bloggers conclude with some commentary:

“Moody’s assigned its B3 rating to UCP. This represents a deep non-investment grade rating. Of all publicly traded US builders, only Hovnanian and Beazer carry equal or lower ratings: Hovnanian is rated equal at B3 and Beazer is rated one rung lower at Caa1. Both Hovnanian and Beazer struggle under large debt loads. That UCP carries a conservative 40% net debt-to-capital ratio and is ranked with the lowest of the industry, both of which are financially distressed, tells us how important Scale and Business Profile are to Moody’s.

PIMCO is the current holder of UCP’s $75 million Senior Notes, due October 2017. Obviously, PIMCO refused to roll its position over. In the meantime, rates on 5-year junk debt are up about 50 basis points.

There is no reason to delay a sale of UCP. Chairman Michael Cortney and CEO Dustin Bogue are transferring shareholder capital to UCP Executives, Directors and Employees. Shareholder value is being destroyed every day, with almost every home sold.

In a change of control, UCP’s Executives and its operations have no value. UCP will sell as a land play. No buyer will pay above fair market value for UCP’s assets. Black Friday may have passed, but strong builders are always shopping. We suggest that UCP hang out the sale sign without further delay.”