Moody's cuts Meritage

Moody's Investors Service said it lowered Meritage Homes Corp.'s corporate family and probability-of-default ratings to Ba3 from Ba2 and its senior notes rating to Ba3 (LGD4, 53%) from Ba2 (LGD4, 58%).

The outlook was changed to negative from stable.

The downgrade reflects expected negative cash flow generation this year as the company seems unable to cut inventory at the rate of sales declines, the agency said.

The negative outlook reflects difficult conditions for homebuilding market in 2007 and 2008, thus pressuring company credit metrics, particularly interest coverage, gross margins and return on assets, according to the agency.

The ratings also consider the company's limited geographic reach, the financial and integration risks of an acquisition-based growth strategy and the company's heavy reliance on options, Moody's said.

The ratings are supported by the longer-term strength of Meritage's markets and relatively low supply of owned land, the agency said.

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