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Investing.com -- S&P Global Ratings has upgraded the issuer credit rating of Fort Washington, PA-based Toll Brothers (NYSE:TOL) Inc. to ’BBB’ from ’BBB-’, citing the company’s solid credit metrics. The rating agency also raised its issue-level ratings on Toll Brothers’ senior unsecured debt to ’BBB’ from ’BBB-’ and assigned a ’BBB’ issue-level rating to Toll Brothers Finance Corp’s new senior notes due 2035.
The upgrade reflects the company’s consistent improvement in sustaining debt leverage below 2x. Despite the U.S. housing market’s slower-than-expected pace due to rising mortgage rates, higher home prices, and reduced consumer sentiment from macroeconomic uncertainty, Toll Brothers has managed to maintain solid credit metrics.
S&P Global Ratings forecasts a 3.5% increase in Toll Brothers’ consolidated revenue to $11.2 billion in 2025. However, the company’s EBITDA is expected to decline by about 7% to around $2.2 billion, with margins falling to about 19.5% from around 22% in 2024. The company’s net debt is expected to be about $1.7 billion in 2025, down from around $1.9 billion in 2024.
S&P Global Ratings has also taken into account the current period of macroeconomic uncertainty due to the current administration’s policies around tariffs and immigration. U.S. tariffs have exceeded expectations in both size and scope, raising the downside risks to the current macroeconomic baseline. As a result, the probability of a recession has been increased to 30%-35% by S&P Global economists.
Despite these challenges, the rating agency’s stress test of its 2025 forecast for EBITDA by 50% still resulted in an adjusted debt to EBITDA below the downside threshold of 2x. This gives a high level of confidence in the decision to upgrade Toll Brothers’ rating.
The homebuilding industry is currently grappling with high input costs and tight labor conditions. Despite these challenges, Toll Brothers’ buyers, who generally have more disposable income, have supported earnings due to affordability being less of an issue.
S&P Global Ratings believes that Toll Brothers could maintain debt to EBITDA below 1x over the next two years, benefiting from good cost control and lower net debt. These credit ratios provide a buffer against the inherent cyclicality of the homebuilding industry.
However, the rating could be lowered if the company’s accessible cash balance decreases or if the company issues significant debt to fund aggressive land acquisitions, causing debt to EBITDA to rise above 2x or debt to capital to increase above 35% on a sustained basis.
Conversely, the rating could be raised over the next 24 months if the housing market outperforms expectations, the company adheres to financial policies that strengthen and maintain debt to EBITDA well below 1x and debt to capital well below 20%, and Toll Brothers maintains above-average profitability relative to its peers in all market conditions. The rating could also be raised if Toll Brothers increases its size and scale relative to other BBB+ homebuilders.
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