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Investing.com -- Moody’s Ratings has downgraded LGI Homes (NASDAQ:LGIH), Inc.’s Corporate Family Rating (CFR) to Ba3 from Ba2, the rating agency announced Friday.
The downgrade also affected LGI’s Probability of Default Rating, which moved to Ba3-PD from Ba2-PD, and the ratings on the company’s senior unsecured notes, which dropped to Ba3 from Ba2. Additionally, Moody’s lowered the company’s Speculative Grade Liquidity rating to SGL-3 from SGL-2 and changed the outlook to negative from stable.
Moody’s cited LGI’s elevated leverage and weak interest coverage metrics as key factors in the downgrade. The rating agency noted limited prospects for near-term improvements given current weakness in the homebuilding market, particularly in entry-level demand due to affordability constraints for consumers.
As of March 31, 2025, LGI’s debt to book capitalization stood at 44% while its EBIT to interest coverage was 2.4x. The downgrade also reflects the company’s liquidity, which Moody’s assesses as "only adequate" given expectations of negative to modestly positive free cash flow generation and significant reliance on its revolving credit facility.
The Ba3 rating is supported by LGI’s good market position, revenue scale of $2.2 billion, and broad geographic diversification across 36 markets and 21 states. The company’s business model focuses on standardized home construction that creates production efficiencies.
Moody’s highlighted several constraints on LGI’s credit profile, including its weak interest coverage, high debt leverage, and all-speculative construction strategy that can lead to high unsold home inventory during weak markets. The company also maintains a very long land position with total land supply of 11 years and owned land supply of 9 years as of March 31, 2025.
The negative outlook reflects the risk that LGI’s weak metrics will not improve materially in the next 12 to 18 months given current weakening sector trends.
For a potential upgrade, Moody’s indicated LGI would need to increase revenue size and scale while improving product and geographic diversity. The company would also need to maintain debt to book capitalization below 40% and EBIT to interest coverage above 5.0x.
Conversely, further deterioration in credit metrics or liquidity could lead to additional downgrades, particularly if debt to book capitalization approaches 50% or EBIT to interest coverage remains below 4.0x.
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