Fitch Rates KB Home's Proposed $150MM Convertible Sr. Notes Offering
'B+/RR4'; Outlook Stable
NEW YORK -- January 22, 2013
Fitch Ratings has assigned a 'B+/RR4' rating to KB Home's (NYSE: KBH) proposed
offering of $150 million convertible senior unsecured notes due 2019. The new
issue will be equal in right of payment with all other senior unsecured debt.
Concurrent with the notes offering, KBH also announced the public offering of
$100 million of its common stock. The company intends to use the proceeds of
the notes issuance and the common stock offering for general corporate
purposes, including land acquisitions and development.
The Rating Outlook is Stable. A complete list of ratings follows at the end of
The ratings for KBH are based on the company's geographic diversity, customer
and product focus, conservative building practices and effective utilization
of return on invested capital criteria as a key element of its operating
model. The company did a good job in reducing its inventory exposure and
generating positive operating cash flow during the severe industry downturn.
Since its peak in the third quarter of 2006, homebuilding debt has been
reduced from $7.89 billion to $1.87 billion currently (pro forma).
The Stable Outlook reflects the continuing growth prospects for the U.S.
housing sector. Fitch raised its housing forecast for 2012 a number of times
during the course of the year. Nevertheless, the current estimates for the
year still reflect a below-trend line cyclical rise off a very low bottom. In
a slowly growing economy with somewhat diminished distressed home sales
competition, less competitive rental cost alternatives, and new and existing
home inventories at historically low levels, 2013 single-family housing starts
should improve about 18%, while new home sales increase approximately 22% and
existing home sales grow 7%. However, as Fitch has noted in the past, recovery
will likely occur in fits and starts.
The ratings also reflect KBH's business model and marketing prowess. The
ratings take into account the company's current primary exposure to
entry-level and to a lesser degree first-step trade-up housing (the deepest
segments of the market), its leadership role in constructing energy efficient
homes, its reemphasis of the value-engineered Open Series of home designs, its
conservative building practices, utilization of return on invested capital
criteria as a key element of its operating model and its capital structure.
The company maintains a 7.1-year supply of lots (based on last 12 months
deliveries), 72.9% of which are owned and the balance controlled through
options. (The options share of total lots controlled is down sharply over the
past six years as the company has written off substantial numbers of options.)
KBH's most recent credit metrics, while improving in certain cases, remain
stressed. Debt to capitalization was 82.1% as of year-end 2012, up from 78.2%
at year-end 2011. Net debt (debt less unrestricted homebuilding cash) to
capitalization was 76.1%, up from 72.5% as of Nov. 30, 2011. Debt to LTM
EBITDA, excluding real estate impairments, was 17.5 times (x) at year-end 2012
and was 37.0x at the end of 2011. Interest coverage was 0.8x for fiscal 2012
and 0.4x for fiscal 2011.
KBH currently has solid liquidity with unrestricted homebuilding cash of
$524.8 million as of Nov. 30, 2012. The company has also negotiated a
commitment letter with four financial institutions for a proposed $200 million
unsecured revolving credit agreement. This facility has an uncommitted
accordion feature that could increase the facility up to $300 million, subject
to additional bank commitments. The credit agreement is expected to close
during the first quarter of 2013.
The company generated $34.6 million of cash flow from operations (CFFO) during
2012 after investing roughly $565 million in land and development during the
year. For all of fiscal 2013, Fitch expects KBH will significantly increase
its land and development spending as it executes its 'going on offense'
initiative. CFFO could range from negative $350 million to $450 million should
the company increase its land and development spending by 75% to 100% during
2013 compared with 2012 levels.
Fitch is comfortable with this strategy given the company's improved liquidity
position from the proposed equity and notes issuance as well as its newly
established $200 million revolving credit facility. Fitch expects KBH to end
fiscal 2013 with homebuilding unrestricted cash in excess of $300 million.
Future ratings and Outlooks will be influenced by broad housing market trends
as well as company specific activity, such as trends in land and development
spending, general inventory levels, speculative inventory activity (including
the impact of high cancellation rates on such activity), gross and net new
order activity, debt levels, free cash flow trends and uses, and the company's
KBH's ratings are constrained in the intermediate term because of relatively
high leverage metrics. However, a positive rating action may be considered if
the recovery in housing is meaningfully better than Fitch's current outlook,
KBH shows continuous improvement in credit metrics, and maintains a healthy
liquidity position. In particular, debt leverage would need to approach 4x and
interest coverage would need to exceed 4x in order to take a positive rating
Negative rating actions could be triggered if the industry recovery
dissipates; KBH's 2013 revenues drop by the mid-teens while the pre-tax loss
approaches 2011 levels; and the company's liquidity position (a combination of
cash and revolver availability) falls sharply, perhaps below $350 million.
Fitch currently rates KB Home with a Stable Outlook as follows:
--IDR at 'B+';
--Senior unsecured debt at 'B+/RR4'.
The Recovery Rating (RR) of 'RR4' on KBH's senior unsecured notes indicates
average recovery prospects for holders of these debt issues. KBH's exposure to
claims made pursuant to performance bonds and joint venture debt and the
possibility that part of these contingent liabilities would have a claim
against the company's assets were considered in determining the recovery for
the unsecured debtholders. Fitch applied a liquidation value analysis for
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Rating and Notching Criteria for Non-Financial Corporate Issuers'
(Aug. 14, 2012);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Liquidity Considerations for Corporate Issuers
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Robert Curran, +1-212-908-0515
One State Street Plaza
New York, NY 10004
Robert Rulla, CPA, +1-312-606-2311
Jason Paraschac, +1-212-908-0746
Sandro Scenga, +1-212-908-0278 (New York)
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