Meritage Homes Issues Notes

Homebuilder Meritage Homes Corporation (MTH - Snapshot Report) recently announced that it will redeem its 6.25% senior notes due 2015 carrying an aggregate principal amount of $285 million.

In order to pay off this debt, the company will raise another debt comprising senior unsecured notes due 2022 carrying a coupon rate of 7% and an aggregate principal amount of $300 million. The closing date for this notes issue is April 10, 2012.

The remaining proceeds from the 7% notes issue together with the current cash in hand will be used for repurchasing approximately $26 million aggregate principal amount of the company’s outstanding 7.731% Senior Subordinated Notes due 2017.

Adjusting for the above transactions, management estimated that the balance sheet as of December 31, 2011 would have reflected approximately $313 million of cash and cash equivalents and approximately $596 million of total debt outstanding.

Meritage Homes is a designer and builder of single-family attached and detached homes in the historically high-growth markets of southern and western United States. Meritage Homes is facing a fragile housing market. The downturn in the housing industry, aggravated by an overall weak economy, high unemployment rates, reduced credit availability, rising interest rates and reduced consumer confidence, has been weighing down on homebuilders like Meritage Homes and its compatriots KB Home(KBH - Analyst Report), DR Horton, Inc. (DHI - Analyst Report), Pulte Group (PHM - Analyst Report) and Lennar Corporation (LEN - Analyst Report).

Besides, the housing market became extremely aggressive and Meritage Homes’ new homes faced tough competition from housing alternatives, including resale homes and foreclosed homes. Increased availability of housing alternatives has kept the company’s earnings under pressure.

Though still sluggish, many of these homebuilders are seeing signs of improvement in some of their markets. However, it is generally believed that the housing market will show a slow recovery in the coming years in line with the overall economy.

Our Recommendation

We currently have a Neutral recommendation on Meritage Homes. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).