Planned KB Home Debt’s Appeal Hampered by Leverage

KB Homes relatively strong position in the market make its planned senior notes attractive but its high leverage creates some recovery risk, analysts say.

The $350 million in proposed senior unsecured notes due 2021 currently have a 50% to 70% chance of recovery in a default for those reasons, according to Standard Poors.

We believe KB Home’s EBITDA-based metrics, notably debt to EBITDA, will remain weak through 2014 despite our expectation for improved profitability, SP says in a report.

Holders of this debt will have average recovery prospects, according to Fitch.

Debt leverage would need to approach 4x and interest coverage would need to exceed 4x in order to take a positive rating action, Fitch says in its report, noting that the companys most recent credit metrics, while improving in certain cases, remain stressed.

The company plans to use the net proceeds from the notes to fund a tender offer for any and all of its almost $76 million in 5.75% senior notes due 2014 and more than $102 million in 5.875% senior notes due 2015, as well as up to $37 million of its 6.25% senior notes due 2015, SP notes. Any excess proceeds would be used to bolster cash and be used for general corporate purchases.

The companys cash flow from operations has been negative so far this year due to aggressive land and development spending, Fitch notes.

Article source: http://www.nationalmortgagenews.com/dailybriefing/Planned-KB-Home-Debt-Appeal-Hampered-Leverage-1039412-1.html

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