KB Home Issues $400 Million of Bonds as Housing Sales Decline

KB Home sold $400 million of bonds that it may use to acquire and develop land, in its first offering in five months.

The builder issued 4.75 percent, senior notes maturing in 2019 that yielded 304 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Proceeds from the sale, which was increased in size from $300 million initially marketed, may be used for general corporate purposes, including land acquisitions and land development, according to a statement yesterday from the Los Angeles-based company.

The new notes are graded B2 by Moody’s Investors Service, which today changed its outlook on KB Home to “positive” from “stable.” KB Home, which mostly focuses on first-time home buyers, issued the debt as data showed purchases of previously-owned homes in the U.S. declined in February to the lowest level since July 2012.

“They’re sort of looking at the market advantageously,” Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. Issuing now gives KB Home “an ability to secure additional liquidity, while financing is cheap.”

Moody’s “expects the company’s credit metrics to continue to improve over the next year as it benefits from increasing demand for new homes,” according to a statement today. In October, KB Home sold $450 million of 7 percent securities due 2021 to yield 460 basis points more than similar-maturity Treasuries, Bloomberg data show.

KB Home reported fiscal first-quarter earnings yesterday that beat estimates as it raised prices and opened communities in high-cost, land-constrained markets, such as parts of California.

Index Roll

The cost to protect against losses on U.S. corporate bonds increased as banks and investors began trading a new series of a credit-default swaps benchmark index that has a longer maturity.

Series 22 of the Markit CDX North American Investment Grade Index, used to hedge against losses or to speculate on creditworthiness, traded at 71.5 basis points at 5:20 p.m. in New York, compared with 64.5 basis points for the previous series’ close yesterday, according to prices compiled by Bloomberg.

New versions of Markit Group Ltd.’s indexes are created every six months. Companies in the measure are replaced if they no longer hold appropriate grades, aren’t among the most actively-traded borrowers or fail to meet other criteria. Series 22 was forecast to trade about 10 basis points wider because of the six-month extension in maturity, Morgan Stanley analysts led by Ashley Musfeldt wrote in a research note dated March 19.

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Commercial Paper

The market for corporate borrowing through short-term IOUs declined as issuance by financial institutions fell. The seasonally adjusted amount of U.S. commercial paper decreased $1.9 billion to $1.019 trillion outstanding in the week ended yesterday, the Federal Reserve said today on its website. That’s the lowest level since the market touched $1.012 trillion in the period ended Feb. 26.

Commercial paper sold by overseas financial institutions declined $4.3 billion to $256.4 billion, the lowest level in three weeks. The amount issued by U.S.-based banks fell for a second week, decreasing $2.1 billion to $279.4 billion.

Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as rent and salaries.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, narrowed 8.7 basis points to 314.4 basis points, Bloomberg prices show. Speculative-grade bonds are rated below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt was little changed at 98.2 basis points, Bloomberg data show.

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