Moody's Investors Service may cut its credit rating on Ryland Group Inc. into junk territory, citing concerns about the home builders' ability to cut inventory and generate positive cash flow, the rating agency said Monday.
The Calabasas homebuilder and rival D.R. Horton, the largest U.S. homebuilder, have struggled recently to generate cash flow, in part because of their limited success to date in reducing inventory, in part because of continuing high cancellation rates, and in part because of the fiercely competitive environment the two companies face in most of their markets, according to a Moody's statement.
Moody's currently rates Ryland and Hortons senior unsecured debt Baa3, which is the lowest investment-grade rating. Horton also faces a downgrade.
Traditionally, when a companys debt rating is downgraded from investment grade to junk status, it forces large pension funds and institutional investors to sell the debt because they are prohibited from holding such bonds. In addition, it costs companies more to borrow money as investors demand higher yields due to the greater perceived risk of the debt.
Shares in Ryland were up 18 cents to $29.19 in afternoon trading Wednesday on the New York Stock Exchange.