Moody's cuts McMillin

Moody's Investors Service said it lowered all the ratings of McMillin Cos., LLC, including the company's corporate family rating to Caa2 from B2 and senior notes ratings to Caa3 from B3.

The outlook is negative.

The agency said that the downgrades and negative outlook reflect the following:

• i) Moody's does not see a sector recovery beginning before well into 2009 at the earliest, with any recovery likely to be very measured at first, thus prolonging the company's underperformance on key financial metrics vs. prior expectations;

• ii) Actual inventory performance (adjusted for impairments and option abandonments) over the past four quarters has been disappointing. Moody's said it remains concerned that McMillin's inventory levels for the coming quarters will show little real reduction, if any, thus impeding sustainable cash flow generation;

• iii) The company has violated the interest coverage incurrence test (not maintenance test) in its bond indenture. As a result, liquidity, although in satisfactory shape currently from a large pre-emptive draw on the revolver, may tighten substantially by year-end 2008 unless the covenant is successfully renegotiated;

• iv) McMillin's adjusted debt leverage, 61.2% at June 30, will remain elevated as cash flow generation will be insufficient to repay any significant amount of debt, while equity continues to be eroded by impairment and option abandonment charges; and

• v) The company's relatively small size and-scale and limited geographic, product and price point diversity worsen the effects of the California housing downturn.

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